As a trustee of a SMSF, it’s illegal for you to purchase assets or transfer assets as a super contribution, from fund members or related parties. This rule has been put in place to prevent members taking cash out of the fund before they retire.
What’s a related party?
Under the super laws, a ‘related party’ is broken up into two categories:
- Part 8 Associates; and
- Standard Employer-Sponsors
Part 8 Associates: a ‘Part 8 Associate’ can be defined as a member’s relatives or partners and any companies/trusts in their control. In terms of super, a ‘relative’ includes a parent, grandparent, brother, sister, uncle, aunt, cousin, nephew or niece.
Standard Employer-Sponsors: an employer who contributes to the fund for the benefit of a member of the fund or for the dependents of a deceased member, under an arrangement between the employer and the trustee. The rule doesn’t apply to an employer who contributes based on an arrangement with a member of the fund (known as employer-sponsor).
Distinguishing between the two can be confusing. The case study below can clear things up.
Case Study: Steve and Elizabeth
Steve and Elizabeth run their own SMSF. They’re both members and trustees. Steve is employed by his own company which makes contributions into his SMSF on his behalf.
If the arrangement to make super contributions into Steve’s SMSF is between the company and Steve in his capacity as a trustee of the SMSF, then the company will be a standard employer-sponsor, and therefore isn’t allowed to sell assets to Steve’s SMSF.
If the arrangement to make super contributions into Steve’s SMSF is between the company and Steve in his capacity as a member of the SMSF, then the company will be an employer-sponsor and the rule will not apply.
Exceptions to the rule
You can’t acquire assets from fund members and related parties except when the asset falls within one of the following categories:
Listed securities: a listed security includes shares, units bonds and any other securities listed on an approved stock exchange, for example the Australian Securities Exchange (ASX).
Term deposits: where you deposit an amount of money with a bank or financial institution for a specific period of time at an agreed interest rate.
Managed funds: a fund may acquire units in a widely held trust from the member, for example units in a managed fund.
Business real property: Business real property is land or buildings used exclusively for business purposes. This can include offices, shops, factories and even farms. A SMSF can purchase business real property from members as an investment, and can then even lease the property back to the same fund manager. However this does not apply to residential property.
In-house assets valued at less than 5% of fund assets: In-house assets are investments in, or loans to, or leasing agreements with, related parties. You can invest in an in-house asset but the investment must be less than 5% of the value of your fund’s total assets. For example, if a fund owns a residential property and leases it to a fund member, the total value of the property must be less than 5% of the fund’s total assets to comply with the super laws.
If the asset falls under any of the above exceptions, then the fund can purchase the asset or accept it as a super contribution from the member or related party. The acquisition must be at market value. Breaching this rule could result in gaol time (up to one year). Therefore, consider using a qualified valuer when then nature of the asset makes it difficult to accurately determine its market value.
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